Portfolio constraints, differences in beliefs and bubbles

Florin Bidian

Journal of Mathematical Economics, 2015, vol. 61, issue C, 317-326

Abstract: I propose an arbitrage-based theory of bubbles in economies with general portfolio constraints and differences in beliefs. I find that, in general, bubbles cannot exist unless the constraints restrict the demand for credit sufficiently to induce low interest rates. Speculation due to heterogeneous beliefs does not cause bubbles. Ruling out bubbles under asymmetric information requires stronger assumptions: the presence of some uninformed agents and mild portfolio restrictions (debt or borrowing constraints), or alternatively, the existence of some impatient and fully informed agents.

Keywords: Portfolio constraints; Rational bubbles; Speculative bubbles; Resale option; Asymmetric information; Heterogeneous beliefs (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:61:y:2015:i:c:p:317-326

DOI: 10.1016/j.jmateco.2015.10.001

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